May 2014

The Importance of Good Business Credit

Good Credit Isn’t Just for Individuals

If you’re a business owner, you have worked hard to establish a customer base and build a reputation in your community. Being your own boss demands significant commitment and sacrifice. Unfortunately, many business owners fail to recognize strategies and tools that can help their businesses grow without compromising their personal financial security. Business credit is a financial tool that can promote both business growth and personal creditworthiness.

What Is Business Credit?

Sometimes called trade credit, business credit is similar to personal credit. Like personal credit, lenders extend credit and receive interest in exchange. And as with personal credit, financial institutions also offer more favorable terms to businesses with higher credit scores and a record of making timely payments.

Despite these similarities, there are some important distinctions between personal and business credit. When an individual obtains a personal credit card, lenders are required by law to report the cardholder’s timely payments. Commercial lenders aren’t required to make automatic reports. Instead, they have the choice to submit – or not submit – a business’s positive track record of on-time payments. Additionally, business credit scores range from 0 to 100, whereas personal credit scores fall between 300 and 850. Commercial lenders generally offer the best terms and interest rates to businesses with trade credit scores of 75 or above.

Why Is Business Credit Important?  

Whether you sell pet-sitting services or camera equipment, you will need business credit at some point in your company’s lifespan. The sooner you start building your business’s credit profile, the sooner you can separate your business and personal finances.

Many business owners rely on their personal credit information to borrow money for their business. Unfortunately, many don’t realize that this causes business debts to show up on their personal credit report, which can lower their personal credit score. Lenders see business debts alongside personal debts, which can cause a business owner’s available credit to dry up. A business owner who has a mortgage, a car loan, a business line of credit, and other business-related debts is likely to appear risky to lenders.

How to Start Establishing Business Credit

Form a corporate entity. Operating as a sole proprietorship might seem faster or easier than forming an LLC or corporation, but it also exposes the sole proprietor to personal liability for any business debts. Corporate entities, such as limited liability companies, shield owners from liability for business debts.

Register as a corporate entity with the business credit bureaus. Business owners must register with the business credit bureaus, such as Dun & Bradstreet.

Maintain accurate business records. Many commercial lenders will only work with businesses that can provide quarterly statements, bank account records, or other financial documents.

Business credit can provide the financial fuel your business needs to thrive. It also minimizes your personal liability by separating your corporate entity from your personal credit. Contact the Law Office of Randy L. Smith at 417-841-2775 to discuss your business goals.

This website has been prepared by The Law Office of Randy L. Smith, LLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.